MC Explains: What is market coupling and why does the govt want it?

At present, power exchanges account for only 7 percent of electricity trade and the rest is mostly through long-term PPAs which restrict fluidity and liquidity in the sector.

The term “market coupling” has been buzzing on the internet since June 8 and even resulted in the stocks of Indian Energy Exchange (IEX), a bourse for electricity trade, crashing by 23 percent in just two days.

Moneycontrol gives you a lowdown on this development.

What is market coupling?

India has three power exchanges – IEX, Power Exchange India Limited (PXIL) and Hindustan Power Exchange Limited (HPX). These are voluntary markets and each of them collect buy bids and sell bids on their own, and thus, come up with their own market clearing prices (MCP). In simple terms, currently, each power exchange has a different cost of electricity, even though it is usually higher or lower to each other only by a few paisa.

Market coupling is a model where buy bids and sell bids from all power exchanges in the country will be aggregated and matched to discover a uniform MCP. It means there will be only one price for the electricity that is to be traded at any point of time through these exchanges. If implemented, power exchanges will rendered as a platform where only buy and sell bids will be received and power dispatched to the buyer.

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Why is it in news now?

It is in news now because the government has given its approval to introduce market coupling in the electricity sector.

In fact, Moneycontrol was the first to give out the details of the government’s plans (read here), based on a letter dated June 2, which was sent by the ministry of power to the Central Electricity Regulatory Commission (CERC).

Is market coupling going to be implemented immediately?

No. The process of implementing market coupling in India’s electricity sector is going to take at least six months. It could also take a year or more, depending on the feedback received from stakeholders. CERC officials told Moneycontrol, requesting anonymity, that it is now going to begin the process of preparing a proposal on this after which stakeholder consultations will be initiated.

Besides, the process will also take a lot of technology upgrades and bringing in new systems, which will take time.

Will it impact the end consumer?

Market coupling, upon its implementation, is not going to have any immediate impact on the end consumer of electricity (household, industry or commercial). However, in the long-run, power ministry officials and a section of stakeholders say it will lead to an overall reduction in power tariffs.

Why does the government want market coupling?

Apart from the point of uniform price discovery across exchanges mentioned above, the government wants market coupling also because it wants to significantly increase the share of power exchanges in the trade of electricity. The government wants to reduce the current format of long-term power purchase agreements (PPAs), which run for as long as 25 years.

It will also help improve the overall allocation of transmission corridor amongst the power exchanges. At present, transmission corridors are not optimal due to the skewed market share of various power exchanges.

Besides, government officials said it is also required for efficient integration of renewable energy which is going to constitute 500 GW in India's installed capacity by 2030.

Also, to shift to a market-based electricity trading system, the government needs to implement the Market-Based Economic Dispatch (MBED) mechanism in India, which is not possible without market coupling. MBED envisages a centralised scheduling for dispatching electricity across the country at the inter-state as well as intra-state level. At present, electricity dispatch happens at multiple levels – state as well as Central – for which modes of trade are also multiple (PPAs, exchanges and power banking).

Currently, power exchanges account for only seven percent of India's electricity trade and the rest is mostly through long-term PPAs which restrict fluidity and liquidity in the sector. For example, if a generating company (genco) has higher price of power, the distribution company (discom) will have to procure electricity from it due to the PPA signed with it, despite other gencos offering lower power prices.

If MBED is implemented, it will give flexibility to both buyers and sellers. This is how through MBED power tariffs also will come down in the long run.

Why did IEX shares tumble?

Of all the electricity that is traded in the Indian power exchanges, IEX has a share of about 90 percent. Power exchanges offer different products such as Day-Ahead Market (DAM), Real-Time-Market (RTM), Term Ahead Market, Green-Dam and so on. DAM and RTM contribute 75-80 percent of the country's total exchange volumes, of which IEX holds nearly a 100 percent market share.

Market coupling, once implemented, is likely to reduce the dominance of IEX in terms of market share, which was the primary reason for its share prices to hit a 52-week low of Rs 116.05 on June 9 morning.

Who aggregates and discovers the price in market coupling?

There are two ways on how market coupling can operate. One, where an external agency termed as the Market Coupling Operator (MCO) will collect the bids and discover the MCP, while also being the custodians of registrations, deposits, payment securities, settlement of financial dues and so on. In India’s case, it could be Grid-India, if the MCO model is used.

Second option is a roster system, where the power exchanges take turns in aggregating the bids and discovering the uniform MCP.